We are conducting independent empirical research that we believe should be of interest to the Commission with respect to the proposed amendments regarding tax services (Section II.B.11). The American Accounting Association sponsored the research through a program agreed to by the Commission.

The research relates audit firm fee data from six of the seven largest audit firms to restatements of previously issued annual and interim financial statements. We analyze restatements because of the Commission's focus on restatements as a measure of failed financial reporting. Part of the fee data that we collected is the dollar amount of tax services fees that registrants paid their audit firms. Briefly stated, our data show that registrants with higher levels of tax services fees to their audit firm are associated with substantially lower instances of financial restatements.

To obtain our sample, we first used public information to identify registrants that restated their previously issued financial statements (Form 10-K or Form 10-Q) over the six year period 1/1/95 through 12/31/00. We then precision matched each restatement firm with a comparable firm in the same industry, having the same auditor, and nearest in size as measured by revenues for the same time period. Finally, through confidentiality agreements, we obtained detailed fees for six categories of audit firm services.

Fee data obtained to date include 825 observations of which 382 are from firms restating their financial statements and 443 are from matched non-restating firms. We compare the average tax services fees for restatement and non-restatement firms, and conduct multivariate analyses relating restatements to tax services fees after adjusting for economic and registrant-specific business factors. Results of the two analyses are consistent -- tax services fees paid by registrants to their audit firms are negatively associated with restatements, both on average and after adjusting for business and economic factors. This relation holds across various partitions of the data and alternative measures of absolute and relative tax services fees.

We did not ask the audit firms for components of tax services fees (such as tax opinion fees, tax strategy consulting fees, or tax filing assistance fees). Therefore, factors related to the negative relation of tax services to restatements are not known. However, the pervasiveness of the relation suggests that at least some types of tax services may protect investors by reducing the probability of restatement ex ante.

Based on these results, we believe that it would be premature for the Commission to restrict tax services by a registrant's audit firm. As an alternative, investor protection might be enhanced if a possible ruling were deferred to allow the PCAOB to pursue research to determine whether (and how) tax services may provide timely protection to investors by reducing the incidence of restatements ex ante.

We would be pleased to answer any Commission or staff questions regarding this research in progress.